Anheuser-Busch InBev SA/NV
Q3 2014 Earnings Call Transcript

Published: 31 Oct 2014

[Operator:]

Welcome to the Anheuser-Busch InBev Third Quarter 2014 Earnings Conference Call and Webcast. Hosting the call today from AB InBev is Mr. Carlos de Brito, Chief Executive Officer. To access the slides accompanying today's call, please visit AB InBev's website now at www.ab-inbev.com and click on the Investors tab. Today's webcast will be available for on-demand playback later today. [Operator Instructions] Some of the information provided during the conference call may contain statements of future expectations and other forward-looking statements. These expectations are based on the management's current views and assumption and involve known and unknown risks and uncertainties. It is possible that the company's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. For a discussion of some of the risks and important factors that could affect the firm's future results, see Risk Factors in the company's latest annual report on Form 20-F filed with the Securities and Exchange Commission on March 25, 2014. AB InBev assumes no obligation to update or revise any forward-looking information provided during the conference call and shall not be liable for any action taken in reliance upon such information. It is now my pleasure to turn the floor over to Mr. Carlos de Brito. Sir, you may begin.

[Carlos Alves de Brito:]

Well, hi, thank you, Jackie, and good morning, good afternoon, everyone, and welcome to our third quarter 2014 results conference call. Let's start with the highlights of the quarter. This quarter was marked by solid underlying commercial performance in our top markets, with good revenue and revenue per hectoliter growth. However, EBITDA growth was only 1.3% as a result primarily of 3 factors

[Felipe Dutra:]

Thank you, Brito, and hello, everyone. Brito has covered our top markets in some detail, and you will find additional information about the other relevant markets in our press release and the appendix to today's presentation. Slide 21 shows the EBITDA breakdown by zone for both the third quarter and year-to-date. As you can see on this slide, our footprint offers a very good balance between developed and developing markets. North America continues to be the largest contributor to our EBITDA, with over $5 billion year-to-date, with Latin America-North and Mexico contributing approximately $3.5 billion and $1.5 billion of EBITDA year-to-date, respectively. We are pleased with our footprint. And although we have seen some volatility in developing countries in recent months, we remain optimistic about the growth potential in these markets. We see meaningful opportunities for increased per capita beer consumption, driven by both growth in disposable income and our own commercial plans. I would now like to quickly review our EPS and below EBIT results before we move to the Q&A section. Normalized earnings per share in the third quarter increased to $1.42 from $1.36 in the same period of last year. This increase is primarily due to a lower net finance costs, driven by lower interest expenses and currency gains reported in other financial results, while the third quarter last year included a negative currency result. Net finance costs in the quarter were $366 million compared to $562 million in the same period last year. This decrease of almost $200 million was mainly due to lower interest expenses and a positive currency impact reported in other financial results compared to a negative currency impact in the third quarter of last year. Our normalized effective tax rate for the third quarter was 19.7% compared with 21.3% in the same period of last year. This result was largely driven by higher interest on capital paid in Brazil and differences in country profit mix. As a result of the third quarter performance, we are amending our guidance for the normalized effective tax rate for the full year 2014. We now expect the full year rate to be at the lower end of our previous range of 21% to 23%. As usual, this assumes 0 gains or losses on the hedging of our share-based payment programs for the fourth quarter. As Brito mentioned, the board has declared an interim dividend for fiscal year 2014 of EUR 1 per share, which compares to an interim dividend for fiscal 2013 of EUR 0.60. As you may recall, when we announced at the first semiannual dividend last October, one of our goals with the November dividend was to better balance our dividend payout with our cash flow generation. We also stated last year that over time, we expected that the November interim dividend would be growing irrelevant when compared to the one usually paid in May. This year's interim dividend increase is a reflection of that strategy. Our capital allocation objectives remain unchanged. Our first priority will always be to invest behind our brands and to take full advantage of the organic growth opportunities in our business. M&A remains our core competency, and we'll always be ready to look at opportunities if and when they arise, provided that the target, beer structure and price makes sense. We recognize the value of growing dividends over time, consistent with the low volatility of our noncyclical business. And our goal remains to want to reach a dividend yield between 3% to 4%, in line with all other large capital consumer goods companies. Our optimal capital structure remains a net debt-to-EBITDA of around 2x, and as we approach this level, the return of cash to shareholders is expected to be comprised of both dividend and share buybacks. And with that, I will hand back to Jackie to begin the Q&A section. Thank you.

[Operator:]

[Operator Instructions] Our first question is coming from Andrea Pistacchi with Citi.

[Andrea Pistacchi:]

I have a question and a follow-up, please. The first one is on pricing in the U.S. Now can you strip out mix? I think your pricing in the U.S. has been trending at around 1%, 1.5% in the past few quarters, which seems to be less than previous years and also a bit less than your main competitor in the U.S. So should we interpret this as a fact that you're using the pricing tool a bit more proactively this year to stimulate volume? And also, if there's anything you could say, please, about the -- this year's price increase, the October price increase in terms of magnitude, timing, if it all went through at the beginning of the month. And then the follow-up, please, is on Montejo. If you could talk a bit about what the ambition is for the brand, how big you think this could realistically become in the medium, long term. Yes, that's it.

[Carlos Alves de Brito:]

Andrea, it's Brito here. So in terms of price, I mean, as we said in the last 2 quarters, with the launch of the 25-ounce can, which is diluted at that net revenue per hectoliter line but accretive at the gross profit line, we would phase up until this quarter, third quarter, a negative package mix that would influence the net revenue per hectoliter. That's why it's lower than what you used to see, but that has been the case for the past third quarters. Now for the fourth quarter, this thing has lapped. And what you see is a more normal net revenue per hectoliter in the U.S. because the 25-ounce is now in the base. So fourth quarter will be back to what we can call normal. On your second question of Montejo, we're very excited about it. When you think about it, the Mexican import segment is around 8% to 9% of the total U.S. market. We had no presence up to the Montejo introduction in the 4 states that we did in the Southwest part of the country. It's an amazing brand. It's a jewel coming from Mexico. It has a lot of heritage since 1900. It talks a lot to the Mexicans in terms of traditions, and that's how we're positioning the brand. And we have a great program for sampling and introduction in those 4 states. Early days, but if you look at repurchase and retrial, the numbers are very encouraging, the liquid is really spot on to what consumers want, and again, it's truly connected to the Mexican heritage. There's more to come from where Montejo is coming. Let's remember that we are the top brewer in Mexico, and there are more brands to come, but at this point, we're not going to be detailing which brands. Also, going back to your first question, we have also recently taken a price increase in the U.S., that's broadly in line with inflation. And that, together with the package mix explained, will get you to the fourth quarter on a more normal basis as we used to see.

[Operator:]

Our next question comes from the line of Nik Oliver with Bank of America Merrill Lynch.

[Nik Oliver:]

A question on Brazil. I mean, just given the softer macro backdrop, could you perhaps talk about some of the tools you've got to help manage profitability in 4Q and into next year, both on the top line, thinking maybe new distribution points and then maybe lower down the P&L, perhaps lower marketing spend? And on that note, also, the transactional FX exposure for next year, is that fully hedged in there in Brazil? Or is there still some spot exposure left?

[Felipe Dutra:]

Nik, Felipe here. We keep our 12 months rolling hedging policy in place to cover the transaction. Our exposure, you should assume -- although we may deviate a bit here and there, you should assume broadly that most of next year is already covered.

[Carlos Alves de Brito:]

And Nik, on your first question about Brazil, I think you put it very well. I mean, you have this -- the soft economy, but that we can't do much about it. But as you said, what are the tools that we can control and implement in the marketplace, and that, this year, 2014, has shown a lot of those tools. So the whole thing about trying to bring prices of beer more in line with general CPI, after 2 years, 2012 and 2013, of doubled inflation because of taxes, so I think consumers had a little bit of a break this year. Also, what we're doing in terms of returnable package introduction, the 300 ml, together with the 1 liter, giving consumer different price points and giving them a great price for the brands they love because -- as compared to the one-way package. Also the pack price strategy that we've used with the one-way packages in terms of trying to give consumers a better buy in supermarkets, varying 12, 18s, 24s, 2 for 3, 5 packs, always with good margins for us, but also good prices for consumers. Also with innovations, we see lots of innovations that we have in the pipeline like Brahma 0.0% that has an amazing result, 60% of the NA category, and also Skol Beats that's coming and the Skol Beats Senses that's coming on top of that. And that's all on the top of a premiumization that's taking place in Brazil. I mean, we see that premium brands have grown 20% year-to-date. Budweiser is the clear #1 now, be it among international premium or domestic premium brands, and that was not the case a year ago. So the World Cup was a big help in the marketing investments. Stella and Original also growing nicely, and Corona now in the fourth quarter being introduced. So I think consumers in Brazil are also trading up like in many other markets, and we have the brands to offer, and again, 20% growth this year. So I think there are many ways for us to tackle the soft economy in the sense of giving consumers affordability, alternative price points and premiums that they -- and brands that they love and that they keep coming back to. And this year was an amazing year of trying to rebalance this price, share and preference in marketing investments equations. So we're very happy with what we've -- our team has accomplished in Brazil this year.

[Operator:]

Our next question comes from the line of James Edward Jones with RBC.

[James Edwardes Jones:]

Your volume growth in 9 months was up less than 1% despite a 100 basis point increase in marketing and sales expenditure. How disappointed are you with this?

[Carlos Alves de Brito:]

James, it's Brito here. I think we made a decision to increase, as we said last year, in our outlook for this year of sales and marketing investments for this year, 2014, because firstly, we want to continue to support our top line, a sustainable top line growth in the future. Second, because we continue to see our brands with great opportunities for them to be bigger than they are today because we see programs behind those brands that deserve the support. And third, because we signed this year a couple of opportunities that are unique for this year. So for example, we saw the FIFA World Cup as an amazing opportunity to, in all markets around the world, including the U.S., to our surprise, to get our brands, to increase brand health and our volumes also to increase and also, to prop up big-time Budweiser as a global brand. That was really very important for Budweiser as a global brand, and we do believe that this global brand opportunity is one that deserves investment because there is a big net present value that can be associated with that as an opportunity. Second, in the U.S., we invested heavily behind Bud Light in the summer, and this is the first time we do it in many, many years because Bud Light has always been very associated with sports and continues to be associated with sports, mainly the NFL, and those investments are not during the summer. So we saw with Up For Whatever an amazing opportunity this year to break this trend and invest, as most brands do in the U.S., during the summer, which is a peak consumption season, with the #1 brand in the U.S. And we did it, and the results were amazing. Bud Light increased a full percentage point within the premium light segment over the summer. And by the way, it has been up versus last year within the premium light segment every week, year-to-date this year. So that -- we're very happy with that, and that builds an amazing platform going forward. And now we discovered that yes, summer, Bud Light, #1 brand in the U.S., needs support. So that's also one of the reasons. We also took a decision to increase significantly our investments in the on-premise business in the U.S. The aluminum bottle was a key enabler for Bud Light, for example, on the on-premise. And our high-end brands are growing nicely, back to growth, including the Ritas in the SMB category. So that was nice to see the on-premise responding to our increased investments. And last but not least, the whole thing about our digital strategies that we've learned a lot in the last 2 years with the 2 Super Bowls and now the World Cup, breaking lots of paradigms in terms of numbers that were considered records. We're breaking all those records in terms of engagement and people we're reaching, and that we see an amazing opportunity given all the content that we have, given our sponsorships and the millennials that we want to get closer to with brands like Bud Light. So again, we're very pleased with the results of the World Cup, with the Bud Light share and our on-premise and digital activations. So I think that answers your question on reasons why we increased our sales and marketing kind of level for this year.

[James Edwardes Jones:]

Is it fair to say then, Brito, that we should not expect a significant reduction in marketing expenditure next year?

[Carlos Alves de Brito:]

Well, we're not giving any guidance, but it's fair to assume that the re-base that we did this year in sales and marketing is a one-timer. And that's the new base, so, of course, you should not expect that same category base in every year for sure.

[Operator:]

Our next question comes from the line of Edward Mundy with Nomura.

[Edward Mundy:]

A couple of -- well, first question really on U.S. price and mix, just following up from Andrea's question as to what is the normal level of price and mix. I think CPI is running at about 1.7%. And if you take out the discount from the first-time impact to the 25-ounce can, does that imply that revenue per hectoliter is running at about 2%. First question.

[Carlos Alves de Brito:]

Well, if I understood correctly the question, again, what we've said for the last 2 quarters, and this was true also for this quarter, is that the 25-ounce can is an amazing package that is very important for the brands, but it had an effect of being dilutive to top line but accretive to gross profit. And that this thing, this would produce some negative package mix in the overall net revenue mix per hectoliter, and that this thing would be cycled by the fourth quarter of this year. With the price increase that was implemented now in the U.S. and the now cycling, full cycling of the 25-ounce can, we said we expect now fourth quarter more in line with quarters that we've seen before the 25-ounce can introduction, let's put it this way. So that's the total picture that we can give at this point. For example, the 25-ounce can had an impact of approximately 0.8 percentage points in our total mix. So as you cycle that impact, that will float to the net revenue per hectoliter, for example.

[Edward Mundy:]

That's very clear. So if I tied that altogether, if you take, let's say, CPI of 1.7% and then the 25-ounce can impact of 0.8%, to get to a range of about 2.5%, which is still slightly lower than the 2013 revenue per hectoliter of 3.1%, 2012, 4.9%. I mean, are we looking at a range of between 2% and 3%, as opposed to the 3% to 4% range going forward?

[Carlos Alves de Brito:]

Yes, yes, we're not giving guidance, and then just remember that there are many other impacts in the net revenue. I just mentioned one package, but there's also brands, channel, many other impacts, region, many other impacts to get to a total number. But again, no guidance at this point.

[Edward Mundy:]

Okay. And just as a quick follow-up on Brazil. You mentioned that your market share is at the top end of the range after a pretty successful execution during the World Cup year. What risks do you see of competition pushing the pricing lever to regain some market share?

[Carlos Alves de Brito:]

Well, it's impossible to talk about competition. We never talk too much about pricing. That's a regional decision of our guidance in each country. But what you can see is that, of course, I mean, the net revenue per hectoliter in Brazil being this low and our share being this high in terms of our range of 67% to 69%, that is pointing to some options that we have to present management going forward. And more importantly, I would stick to the guidance that our colleagues from AmBev gave in terms of top line for the year, which is at the upper end of the high single to low double-digit growth for the year. So that guidance remains. And if you put all that together and calculate it for the fourth quarter, you can come to some conclusions there.

[Operator:]

Our next question comes from the line of Trevor Stirling with Bernstein.

[Trevor Stirling:]

Two questions from my side, please. First one, in OB, the revenue was higher in this quarter, I presume seasonal effects playing there, but margins were quite a lot lower. And I was wondering whether one-off effect that had either increased Q2 margins or decreased -- depressed Q3 margins?

[Carlos Alves de Brito:]

Well, Trevor, OB is a new business for us in the sense that we haven't been absent from that market for 5 years. It's still not in the organic figures, so we're still not giving a lot of details on there. But what you can see in terms of our Korea business is that our market share is flat year-on-year, okay, in terms of third quarter. We have very strong brands in Korea. There was an issue there in terms of some off flavors that we had during the third quarter that was dealt with. That impact a little bit the financials because of some product changes that we had to do, but it's all over. And Cass is back to growth, and that's what matters. So again, but that's still being treated as scope and the same way M&A in China is being included in the scope. So you shouldn't read too much into the scope line at this point because there is also M&A in China in there.

[Trevor Stirling:]

Okay. My follow-up question, Brito, Constellation had a problem with glass supply, and I presume that was mainly coming from Modelo or former Modelo factories. Is there a possibility of a charge in future in terms of compensation to Constellation?

[Felipe Dutra:]

Trevor, Felipe here. We are -- today, we have been talks with Constellation and working together. The focus was, first, to get the issue addressed, and it was properly addressed. And we confirm we are currently under discussions with them to resolve this matter, but we cannot anticipate the outcome of that discussion at this point.

[Operator:]

Our next question comes from the line of Chris Pitcher with Redburn.

[Chris Pitcher:]

A couple of questions from me. First on Brazil, Brito, you mentioned back to AmBev's guidance, in terms of the change between Q3 and Q4, you talked about innovations, you've sort of hinted here with your market share upward is at a moment perhaps as a price increase. Can you give us a bit more color on how that fourth quarter is expected to improve on the third quarter, but in the context of the soft consumer backdrop? And then secondly, a question for Felipe. You talked about the opportunity in capital structure for the group, but could you give us a feel for what the optimal capital structure is between AmBev and ABI, because obviously the cash pile at AmBev fell quite a bit in this period, and whether it's -- we would -- we go back to the old days of 1x net-debt-to-EBITDA at AmBev?

[Felipe Dutra:]

Chris, well, Felipe here, let me address your second question. Given the fact that in Brazil, there is this notion of interest on non-cap in which equity is treated as debt for tax purposes. That is the reason why the optimal capital structure for AmBev in Brazil is significantly lower in terms of leverage, net-debt-to-EBITDA as compared to ABI consolidated. In fact, ABI consolidated is also impacted by that. As you would assume that the regular leverage level should have been, under normalcy constants, is well above 2x, perhaps between 2.5x and 3x, that if we were to isolate the impact of this benefit that is currently in Brazil. So AmBev is managing its capital structure within what is best for that business and the same we are doing here at the ABI level.

[Chris Pitcher:]

But specifically, I mean, when you talk in terms of dividend increases and buyback, we should be assuming the same at the AmBev level as well, I think, the scope to buy back shares and increase dividends there?

[Felipe Dutra:]

Well, it's for the board to decide the best way to return cash to shareholders being buybacks or dividends and what kind of leverage each company is going to have. We feel comfortable around 2x the ABI level, and AmBev feel comfortable with the levels they are currently in. As you pay attention on what is being paid out in terms of interest and on capital, as a way to maximize the tax benefit, there is a significant increase year-over-year, and that's being the most effective way to return cash to shareholders at this point.

[Carlos Alves de Brito:]

And Chris, on your first question about fourth quarter in Brazil, I mean, we reiterate AmBev guidance. It's a pretty detailed guidance, but we're not talking adding anything to it at this point.

[Operator:]

Our next question comes from the line of Anthony Bucalo with Santander.

[Anthony J. Bucalo:]

This quarter, it looked like the value brands in the U.S. had a very positive impact on your market share, your overall market share in the industry. The last 5 years or so, you deemphasized the value brands, but it looks like they may be one of the most constructive part of your market share formula here. Are you going to allow the value brands to maybe breathe a little bit more in the market share side? And could you see yourself investing in those? Or do you think it will be steady as she goes, as we've been the last few years?

[Carlos Alves de Brito:]

Yes, I think the, Tony, the value brands will help as well with the 25-ounce can introduction. And of course, it's still an important part of our business, so of course we want to have our fair share there. We're not going to be doing investments as we do in the other segments, but we need to do a minimum to maintain a business that's a very good business overall, not the kind of business we want to grow, but we have great brands. We have the 3 top brands in that segment, and this is a segment where we will have to continue to have our fair share in that segment. So not a focus, but something we need to maintain, of course.

[Anthony J. Bucalo:]

Do you need that value volume as a way to meet your fixed costs and to make yourself industrial -- efficient from an industrial standpoint?

[Carlos Alves de Brito:]

Sure, I mean, that's 25% of our volume, so I mean, of course, that helps pay the bills especially because we don't invest much in terms of marketing. So despite having a lower consumer price, which we don't like, and that's why in the last few years, we have narrowed that gap, the margins are better than you would expect because we don't invest much marketing and sales.

[Anthony J. Bucalo:]

Brito, one quick follow-up. What do you expect João to focus on when he gets up and running in North America?

[Carlos Alves de Brito:]

Well, João will focus on what Luis is focusing, and that is Bud Light growth, Budweiser stabilization, high-end growth and the on-trade focus. Those are pretty much the -- and of course, now we have the Montejo brand and other brands that will come in the Mexican import segment. So those 5 are key for him to focus, as they were for Ron. And this quarter and this year, we're really very happy with Bud Light, and then it's amazing to see a brand that has close to 20% share of total market in the U.S. in a very fragmented market, being able to grow within its segment, like Budweiser did every week this year up to September to which we have data. And that has proven to us that every time you invest in your base brands, consumers come. And the aluminum bottle was a great thing. The Up For Whatever was an amazing campaign with lots of mileage. And the summer, again, the biggest spring of the U.S. was never supported in the summer, sounds obvious. But this year, we decided supporting the summer, and guess what, the results are there. We gained 1 full percentage point within the share of segment, within the premium light segment. So I mean, that's focus number one, Bud Light has to work. And when Bud Light is healthy, everything is in a much better place. Look at what happened to our share this quarter, went from a very negative 65 bps loss to a 30 bps loss with the way we think is a sustainable way. So I think Bud Light, high-end, on-trade and Budweiser, and now the Mexican segment, those are the 5 top priorities.

[Operator:]

Our next question comes from the line of Sanjeet Aujla with Crédit Suisse.

[Sanjeet Aujla:]

Can you just talk a little bit about the recent decision to outsource your media buying in the U.S.? Should we expect that to lead to incremental efficiencies? And by way of a follow-up, can you just clarify whether you actually gained share in the U.S. on-premise? And if so, by how much did you gain?

[Carlos Alves de Brito:]

Well, Sanjeet, in terms of media buying, as you know, we've been buying media with the Busch Media Group for medias, inherited that from the old company. But as the media landscape changed, what we see is that the Busch Media Group that was very, very good at buying sports and traditional media on TV was not as well-equipped because of the volume they buy, not because of anything else, but because of the sheer scale of this other new media. So we decided to look around and we found, of course -- we did a benchmark and we found other media companies that their sole purpose in life is to plan and buy media. And when you look at the WPP, the biggest in the world, of course, they buy media at a better price, especially the new digital and alternative medias compared to Busch Media Group that only buy to ourselves. So that was a clear decision that maybe 5 years ago, when the media landscape was a different one, the decision was not that clear. But today is very clear. And that will be great because a lot of the savings will be pumped back from nonworking money to working money, and we will increase media pressure with the same amount of money. So with the same amount of money, we're going to have more media pressure next year, for example, and that's great for the business. So we're very happy with this change. Busch Media Group did an amazing job for many years, and now it's time to change.

[Sanjeet Aujla:]

And then just the clarification on the U.S. on-premise, did you gain share in that channel, and if so, by how much?

[Carlos Alves de Brito:]

Our trends are much enhanced, much enhanced, but we're not getting any numbers at this point. But the trends are much enhanced. We're very happy with it. And again, Bud Light, the aluminum bottle, the high-end, the bands, the people that we hired at the beginning of the year to be more focused on the on-premise and -- will remain a focus because that's a very important place for you to come with innovation, to create high-end brands, to get consumers to experience those brands. And today's millennials is all about experiential, and the on-trade is the place to give them what they're looking for.

[Operator:]

Our next question comes from the line of Simon Hales with Barclays.

[Simon Hales:]

A couple of questions, if I can, just around Mexico. Brito, I wonder if you could talk a little bit more about the volume performance in the quarter, where you really were seeing share gain after regional differences in the performance there. Secondly, around just the cost-saving delivery from Mexico, how should we really think about this in future quarters now? I appreciate that, obviously, here you had a tough comparative in the most recent quarter from a cost-saving delivery point of view. But should we be thinking about in single tens of millions of delivery per quarter going forward, a much slower rate than we have done historically? And then just a clarification on Mexico, could you just tell us what the scope change was in Q3?

[Carlos Alves de Brito:]

Okay, so let's start with Mexico. I mean, very happy with the progress in Mexico, and then this has been the best quarter in terms of top line performance in Mexico and the industry. Volumes are up 2.9% in the third quarter. Our Focus Brands, Corona, Corona Light, Bud Light, Victoria, growing ahead of that. The Corona family, for example, growing by 4.6% in the quarter, 8.3% in the 9 months. Bud Light doubling the volumes compared to the third quarter last year, and Victoria responded very well to package innovation and a new refresh at its campaign. And I talked a lot about Mexican heritage and pride. So very happy with that. And also with our beer net revenue per hectoliter that grew 4.4%, which is slightly ahead of inflation of 4%, and that has a lot of to do with brand mix as well, especially driven by the strong performance of Bud Light. So that, all in all, that EBITDA to grow by 16.5% on top of a 46% growth in the third quarter last year, with margin expansion this year of 350 basis points, getting to 50.2%. So I mean, very happy, and year-to-date, EBITDA is up 15 -- 25.8% with 775 bps of margin expansion for 47 [ph] margins. So in terms of your second question...

[Felipe Dutra:]

Yes, the scope change, one, and that is primarily linked to the disposal of our convenience chain in Mexico called Extra. So as the deal has closed, we moved that into the scoped column.

[Carlos Alves de Brito:]

And your other question about the synergies, I mean, our guidance is to deliver $1 billion of cost synergies by the end of 2016, with the majority coming by the end of 2015. So they're for next year. So we remain committed to that target. And just to put all the numbers together, with this quarter, we have already delivered $725 million in less than 18 months since the closing. That is more than 70% of the overall synergies and less than 50% of the time. And the cost synergies, as you said at the very beginning, will be a combination of cost of sales and overhead, approximately 45% comes from cost of sales, the remaining 55% from overhead. And again, some of the synergies are quick wins, so they came very fast and ahead of plan in the first few quarters. Others are ones that you have to invest in CapEx, that you have to train people and even change some people, so they're far more complex and will come in the next few quarters. But again, synergies, we remain committed to $1 billion, most of them by the end of next year. If that's going to be the same number every quarter, just remember that in the first 2 quarters, we blew out of the park in terms of synergies being way out of plan. Now we are in between low-hanging fruits and more tougher to get ones that require CapEx and training and change of people and technology. So that's why you have this in-between quarter like this one.

[Operator:]

Our next question comes from the line of Caroline Levy with CLSA.

[Caroline S. Levy:]

My question is also around margins. There seems to be a number of different moving parts as you look ahead, be it the U.S., Brazil, Mexico or China. One thing that appears to be under pressure in the U.S., for example, is transport costs, even though fuel is coming down. So I'm just wondering if you look at the big puts and takes on the margin outlook, or let's just take your major markets, U.S. and Brazil, do you see significant upside from current levels over the next several years? Or do you think it's more about maintaining margins at current levels?

[Carlos Alves de Brito:]

No, no, no, Caroline, hi, Brito here. We continue to see margin up slightly as we've always said, not every quarter, not in every zone, not every year, but that has been a trend. We've been in the business now for 25 years. That has been a consistent trend of margin improvement. And if you talk about transportation costs in North America, you had a couple of things that made the market tight this quarter for us. I mean, we had -- first, we had to buy some spot lanes outside of our contracts because of some short supply and some lanes that were important to us, so something that's a one-off. You're right about fuel going down, that should benefit. We're also implementing some new ways of looking at our overall production capacity in the U.S. and warehousing to make transportation more flexible, so we don't -- we're not forcing attempts to go to the sport market and we can stay within the contract lanes. So that's something that is kicking in as a software that gives us the overall picture of the U.S. and allow us to play a little bit more with inventories than we do today. Today, we do a lot from the line straight to the truck, and that sometimes put some pressure on us having to hire from spot if the contracted transportation company is not available on that specific slot. So in Brazil, also remember that transportation is up also because of us increasing our direct distribution, that increase from 67% to 70%. And we also have the annualization from what it increased this year over last year. So transportation in Brazil, we have to look in conjunction with the net revenue because it just changes line with the benefit to us overall, net-net, that's why we do it, and we've been doing it for many years. In the U.S., there was also the Montejo launch that impacted this quarter because we brought inventories ahead after launch. So the sales are maybe spread out through other months, but the inventory was brought all in 1 month. And because of the tight supply in Mexico, with the Corona and the exports, we had to bring from breweries that were not exactly the closest ones to the border. So I mean, a lot of things that happened when you launch products, and also Rita new flavors. So I mean, all these things, again, a perfect storm in terms of transportation costs for the U.S. this quarter. We don't expect that going forward by any means.

[Caroline S. Levy:]

And just a follow-up on some of those -- they asked about what might change under new leadership. There have been -- you shifted some people around and nobody operates the same way as somebody else exactly. So just any sense of what you could see changing in the U.S. and Brazil over the next couple of years.

[Carlos Alves de Brito:]

Well, I think, I mean, this kind of leadership rotation that we do is part of our culture. We believe that for you to create leaders or better leaders, you have to give them exposure to new markets, new situations, take them out of their comfort zone, and that's what we're doing. So every 5, 6 years, that's what we do. This strategy is a long term one, so it's not because when people change that we're going to change strategies. But of course, when you get new sets of eyes coming from different markets, people come with new ideas and they challenge things that maybe haven't been challenged, and that's always the case, so that's always healthy.

[Operator:]

Our next question comes from the line of Alice Longley with Buckingham Research.

[Alice Beebe Longley:]

My question is about the volume for the U.S. industry. It was, I think, negative 1.3%, and you pointed out that it was worse than year-to-date. And that's a little different from what we've been getting from other staples companies talking about their sectors getting a little better here in the U.S. in the third quarter. And could you comment on that? And if it has something to do with the World Cup, then boosting numbers earlier in the year, then the follow-up would be, what is the sustainable volume for the industry here in the U.S.? Is it negative 1% to 2%? Or do you think it's more closer to 0 for the industry?

[Carlos Alves de Brito:]

Well, Alice, it's Brito here. I mean, just to recap on the numbers. So STRs down 1 -- for the industry, down 1.3% in the third quarter and 0.8% for the 9 months. But what we said is that year-to-date, it's better than what it was the same year-to-date last year. So last year, the decline for the first 9 months of the year was 2.2% decline, and this year is a 0.8% decline. So way better. So that's why we said, and that was the outlook we had at the beginning of the year, that we expected the U.S. industry to get to a better place. It's still negative but getting better. So that's what the numbers will tell us.

[Alice Beebe Longley:]

Do you think the norm is negative 1% to 2% or closer to 0%?

[Carlos Alves de Brito:]

Well, again, we're not giving guidance at this point. But what we see is encouraging because, again, as the economy gets better, of course, that will help us. The economy, of course, could get better -- could be getting better to our consumers at a faster pace because our consumer base is not necessarily the ones that are taking all the advantage of the overall economy getting better, but they have taken some. And I think that's reflected in an industry 9-month year-to-date from last year negative 2.2% to this year, negative 0.8%.

[Alice Beebe Longley:]

But was that negative 0.8% maybe helped by the World Cup and will worsen next year without the World Cup?

[Carlos Alves de Brito:]

Again, we're not giving guidance to next year, though the World Cup in the U.S., as you know, had an effect, but it's nowhere near the effect it has in all of the markets in the world. I mean, in the U.S., the World Cup is growing as something that people care, but still, I mean, you cannot compare it to Latin America, Europe, Asia.

[Operator:]

Our final question comes from the line of Robert Ottenstein with ISI Group.

[Robert E. Ottenstein:]

Two questions, Brito. The market share trend in the U.S. was very, very impressive, and you mentioned that you thought you had done it in a sustainable way, which is also very important. Do you have the sense that perhaps you're close to a tipping point in terms of at least getting to, on kind of a forward basis, close to kind of maintaining market share now?

[Carlos Alves de Brito:]

Well, Robert, our -- the place where we had it is market share stability for sure, do it the right way. And what we see time and again is that whenever Bud Light does well, that is a great step in that direction. And I think what we saw this quarter is worth the investments we did in the aluminum bottle during the summer and the campaign that's very healthy and doing well, the Up for Whatever. We saw that Bud Light performed well, again, gained share every week this year, year-to-date September, every week according to IRI. And that, of course, has a big impact on the overall share equation. That together with Ultra, high-end and value in terms of our fair share. So that's what I meant by getting there the right way.

[Robert E. Ottenstein:]

All right. But do you feel that you've reached some kind of tipping point in a sense in terms of your brand momentum now?

[Carlos Alves de Brito:]

No, we're not giving that kind of guidance, but we feel that the on-premise now is reacting to our investments, and that's an important piece in the global equation. And Bud Light also much better than previous years, and that's also important.

[Robert E. Ottenstein:]

Terrific. And then, Felipe, on the CapEx, you lowered the guidance a little bit. Is that because of weak volumes or you think you can do it for less? Or are you pushing out to next year or anything else?

[Felipe Dutra:]

No, no. As you've said, we reduced that a little bit. It's less than 10%, and that is a combined impact of procurement efficiencies, by securing same projects as why we're spending less than originally expected, as well as the timing of short investments. So no change in the amount of investment. It's just a fine tuning from around $4 billion to around $3.7 billion. It's just to be precise, but it's not relevant in the big scheme of things.

[Carlos Alves de Brito:]

Well, that concludes our call. Thank you very much for your time. Next call is on February 25 next year. And I'll speak to all of you in New York any of these days. But have a great day, and see you next quarter. Thank you. Bye-bye.

[Operator:]

Thank you. This does conclude today's teleconference and webcast. Please disconnect your lines at this time, and have a wonderful day.